It was on the back of a 4.9% fall in the previous fortnightly
auction and prices were now down by about a third on the same
time a year ago, ASB rural economist Nathan Penny said.

ASB has cut its forecast to $6.20 a kg/ms on the assumption
that prices first stabilised and then recovered over the
remainder of the year.

''This is the view we have maintained over much of the year,
but that view is clearly now under threat,'' Mr Penny said.

He expected Fonterra would revise its current $7 forecast
''before too long''.

Price pressure firstly came from a stellar New Zealand
production season, while production had also risen strongly
in Europe and, to a lesser extent, the United States and
China.

There had been lower demand and Chinese buyers, in
particular, appeared to have stockpiled dairy products. The
Chinese economy had also slowed over the year.

''Extrapolating these trends would take dairy prices down
further. And, in such a scenario, a sub-$6 milk price is a
possibility.

''However, we expect a rebound in dairy prices as some of
these factors are one-offs.''

Westpac senior economist Anne Boniface said the bank did not
think the slowdown in China would be permanent. However, the
outlook for the Chinese consumer remained ''wobbly'' in the
near term.

That could mean dairy prices softened a little further over
the next few auctions, she said.

She expected the auction results would be ''one of the key
pieces of news'' digested by the Reserve Bank ahead of next
week's official cash rate review.

The fact the currency markets had largely ignored the
substantial fall in dairy prices since February would be
compounding the impact on the bank's inflation forecasts,
potentially leaving it pondering whether it needed to be in
such a hurry to raise the OCR again next month, she said.

ANZ economists said the recent dairy price action was a clear
reminder the historical experience with commodity price
cycles was that booms tended to be ''short and sharp''.

It was also a reminder that swings in the Chinese economy and
the wider supply side dynamics across the dairy sector should
never be underestimated.

Price falls of that magnitude and a stubbornly high New
Zealand dollar represented a material change to the risk
profile for the economy, and the interest rate and exchange
rate outlook.

Federated Farmers dairy chairman Andrew Hoggard said there
would be ''belt-tightening'' among farmers.

He was also predicting a big fall in dairy farmer morale when
Federated Farmers' new-season farm confidence survey was
released on Sunday.

He recommended farmers that start planning for payout
forecasts being predicted by the banks of between $6 and
$6.25 a kg/ms.

A $6 payout was the practical break-even for about 20% of the
industry with high production costs, he said.

They should be conservative by focusing on debt and
prioritising productive investment.

Federated Farmers hoped the Reserve Bank was ''taking note'',
with interest rates ''seemingly decided by Auckland's house
market and the Christchurch rebuild''.

''It makes for a triple whammy if the forecast payout heads
downhill, a high dollar and the risk of an official cash rate
hike,'' Mr Hoggard said.

Labour's finance spokesman David Parker said the fall in milk
prices showed New Zealand needed an economic upgrade to limit
its over-reliance on the dairy industry, with dynamic
industries such as ICT, wood processing and manufacturing
also contributing to growth.

At a glance •A sub-$6 a kg milk solids
price possible for current season.

•Auction prices down a third on this time last year.

•Chinese demand has slowed.

•Fall in dairy farmer morale expected.

•However, we expect a rebound in dairy prices as some
of these factors are one-offs

Expect NZ prices to stay high to partially offset the losses
caused by the drop to prices that only a couple years ago
were hailed as awesome but are now "bad". This is the true
indication of how much debt servicing is involved and how
much the country rely's on the debt fuelled industry.